5 Strategies To Deal With Bitcoin Downcycle For Investors
Since its inception in 2009, the Bitcoin and cryptocurrency markets have seen many cycles of growth and decline. These cycles may also be seen within the more significant, ongoing patterns known as bull and bear markets. Even though it’s true that a considerable rebound has historically followed every market decline, experienced traders and rookie investors may find market collapses distressing and challenging to handle.
In this post, we will discuss five strategies you may desire to use during a market decline to protect the value of your portfolio, avoid trading based on your emotions, and sleep with little disturbance.
#1 – Resist the temptation to succumb to FUD and FOMO.
Keeping up with the latest bitcoin news and trends is crucial, but getting an overwhelming amount of information is accessible, which may be problematic. Keeping this in mind is especially vital during market downturns when it’s tempting to let your instincts improve and make ill-timed trades.
In the bitcoin sector, the terms “fear of missing out” (FOMO) and “fear, uncertainty, and doubt” (FUD) are often used. The influence of these emotions on our choices to buy and sell cryptocurrencies may be more than many of us would like to admit.
FUD is an acronym representing “fear, uncertainty, and doubt.” This is often used to describe a negative market mindset caused by a rumour, a bad news report, or a significant person expressing concerns about a particular market or asset. Some traders may sell their holdings in response to the anticipation that prices will continue to decline, which may harm the price. On the other hand, FOMO refers to a trader’s tendency to get carried away with wishful thinking after witnessing favourable market movement or news, dismissing fundamental signs in their eagerness to board the next rocket ship to the moon. FOMO opposes a trader’s capacity to recognize and manage risk.
Remember that no one can predict the future and that accepting the advice of a single individual is not as beneficial as doing your research and reaching your conclusions. Influencers and publishers may be vested in generating fear, uncertainty, and doubt (FUD) or fear, uncertainty, and anticipation (FOMO) to move markets in a specific direction. Always attempt to verify information gathered from many sources while researching the most current bitcoin market movements.
#2 – Define your investment goals, diversify your portfolio, and never invest more than you can afford to lose.
Regardless of how certain you will generate a profit, you should never invest more money in a particular item than you can afford to lose. No one wants to be on an emotional roller coaster while waiting for favourable market movement while the value of their portfolio rapidly declines.
When diversifying their portfolios, the vast majority of shrewd investors choose to hold a range of assets over the long term. These assets may vary from alternative cryptocurrencies to index funds on the stock market.
It is often thought that cryptography will always function. The volatility of cryptocurrency markets is well-known, and to protect themselves from this volatility, cryptocurrency investors must predefine their trading strategies and, if possible, their entry and exit points.
Even if you had access to every available piece of information, a black swan event, hack, or tweet from a notable person might cause prices to collapse unexpectedly. Due to this, it is essential to make preparations in advance and make efforts to mitigate the effect of any unanticipated setbacks that may occur.
Using set tactics, such as dollar-cost averaging (the practice of buying or selling modest sums at regular intervals), might enable investors to entirely avoid trading based on emotions and the need to gaze at charts around the clock. These tactics are options for investors to examine.
Remember that it is relatively easy to let your emotions control you when you hold volatile assets such as cryptocurrencies. Investing may be a high-risk activity, significantly when the market is dropping, and investors should set goals that balance minimizing potential losses and maximizing prospective rewards.
— FXScrypto (@FXScrypto) January 18, 2021
#3: Holding assets for the long run and using the HODLing strategy
Although the aphorism “until you sell, it’s not a loss” is only partially correct, there is some validity to the notion that it should be followed. If the value of your assets has fallen after you bought them, resulting in unrealized losses, those losses will not be recognized until the assets are sold for less than they were purchased.
The price of Bitcoin has, on average and over the course of many years, increased gradually. Whether prices are decreasing due to a brief market correction or a more prolonged bear market, data from the past suggests that prices will ultimately rebound owing to economic forces such as scarcity. This is true regardless of the market slump or bear market duration. Numerous people believe that the limited supply of cryptocurrencies such as Bitcoin will cause their values to continue to grow over time. When your investment horizon is somewhat lengthy (years as opposed to weeks or months), it is feasible to see price declines as temporary rather than permanent.
Bitcoin has emerged as perhaps the most successful major asset over the last decade, and one strategy that has proven profitable is holding for lengthy periods.
Keep in mind that some countries, like the United States, have tax benefits connected with holding bitcoin for lengthy periods. Rather than swiftly selling an asset, it may be more beneficial to hold on to it for at least a year.
#4. Be prepared to weather the recession or withdraw your gains.
Converting a portion of your hazardous cryptocurrency holdings into more stable assets is one of the most effective ways to minimize the volatility of cryptocurrencies and protect yourself during a market slump. This may be advantageous to investors in a cryptocurrency bull market since it may help them “lock in” their balance, lowering their risk and the need to manage their portfolio and stress levels actively.
Stablecoins, like USDC, are digital currencies that aim to maintain their value at a fixed level. If you convert a part of your investment portfolio into stable-valued assets, you may lessen your exposure to changes in asset values during periods of calm market conditions.
Keep in mind, however, that selling everything at once, a tactic known as capitulation, might easily cause cryptocurrency investors to lose out on possible rewards if the market rebounds swiftly. Before being placed in a situation where you are forced to make decisions under duress, you must have a general notion of the profit and loss margins you would accept.
Keep in mind that many investors choose to move into and out of reliable assets today as part of a larger strategy, including withdrawals and repurchases, which may help them increase their portfolios gradually at the appropriate moment. However, this is not easy, and even the most seasoned traders make errors when attempting to time the entrance and exit of positions. (Again, dollar-cost averaging may be a great way to avoid trying to time the market, which is a common practice among investors.)
Also, read – 5 Burning Questions About NFT Market Boom and Burst
#5 -Recognize the available alternatives
Even when bitcoin markets are declining, there are opportunities for those who know where to look. Most people envision a long, dismal winter on the cryptocurrency market. Still, intelligent investors see a new window of opportunity to purchase their favoured assets at a discount and make a profit.
“Buying the dip” is a frequent technique used by traders to enter the market or increase their holdings when they believe that recent gains have been priced out.
Even if the market is headed negatively, there will be multiple little peaks and valleys. Traders that have lately improved their technical analysis skills have a high possibility of profiting from this circumstance. Traders may use this information to foresee short-term price swings and profit by purchasing short-term lows and selling short-term highs.
Short selling, sometimes known as betting that the value of an asset will decline, is another successful strategy that may be used during down markets.
Staking and Defi yield farming is two examples of activities that may help to level out returns further and guarantee that your actual cryptocurrency balance continues to grow, even in a down market or during a slump.
If you believe that the price of an item will rise over time, dollar-cost averaging is a method that will work regardless of the market’s direction. During market declines, it is possible to get more bitcoin for the same number of cash.
Keep in mind that these activities (with the probable exception of DCA) are not appropriate for individuals who are easily terrified and may result in significant losses. They will, at the absolute least, drastically increase the time you spend in front of a computer monitor viewing anxious pricing charts. Keep in mind that these activities are not for the faint of heart.